Do you think that maybe, just maybe, the degree of political correctness has now reached an absurd level? In Hillsborough County, a nine year old child has been threatened with sexual harassment charges for writing a love letter to his classmate. In the letter he described how his classmate’s eyes “sparkle like diamonds.” It also notes how the boy finds his crush “pretty,” and features a heart with the words “I like you” within it.

Administrators said that the notes are “unwanted,” and therefore could constitute “harassment”.

As they say a picture is worth a thousands words. Below is a chart comparing the S&P 500 today to 2011. As we can see, today it is tracking 2011, almost in lock step. This suggests that the current pull back in the S&P will extend further.

In our December 17, 2014 issue of Market Musings we stated that fundamentally, we would not see a significant rise in oil prices until we got a correction in the supply/demand ratio.

The latest data from the Energy Information Administration (EIA) shows that OPEC is now winning the market share war as US production is beginning to see significant declines. In April, US shale production peaked at 9.7 million barrels per day & has now fallen to 9.18 mb/day, a drop of over 500kb/day in less than 6 months.

While that is significant, we can see on the following chart that US production is still at the levels exceeding the 1985 high.

As we have shown a number of times in these Market Musings articles & in issues of The Trend Letter, oil rig counts are continuing to fall dramatically, with last weeks Baker’s Hughes Rig Count down 4 rigs to 572. This is a dramatic drop off from the peak of about 1600 a year ago. .

Another chart that we have shown a number of times is the Oil Cycle chart below. As the price of oil increased to over $100 per barrel, producers ramped up production, wanting to cash in on these great prices.

As production increased, so to did the supply. Historically, OPEC would cut back on production to maintain a profitable price for oil, but not this time. This time it was the US producers who were pushing up the inventory & driving prices down, so the Saudis decided it was time for these US shale producers to feel some pain. Over the past year, we have seen an all-out game of chicken, where all producers kept pumping out record levels of oil.

But now the US shale producers have cut back on their new drilling, meaning supply levels should start to decline.

Many companies are projecting capital spending will be 30%-40% lower in 2016. We are reading lots of analysts who are calling this the bottom for oil prices…we beg to differ.

Technically, we are still looking for a drop below $40, & likely a drop to $32. Fundamentally, although US producers are cutting back on exploration, OPEC countries continue to keep the spigot wide open.

Countries like Iraq, Nigeria & Libya are planning to add more production by the end of 2015. And let’s not forget that if Iran is allowed to ship crude when sanctions are removed, this will further depress prices.

So while we are definitely getting closer to a bottom in oil prices, we have a bit of time before that happens. Certainly, there are growing tensions & threats of war,, which would cause oil to spike if these tensions take a turn for the worst.

Also, while US production has been declining, that decline has been slowing. There are still too many speculating that oil will shoot right back to $100. We need to see more pain in this industry & more companies fail, to really get the production down.

The only cure for low prices in oil is low prices. Further cuts & shutdowns are needed before we will see prices rise in earnest.

Oil recently broke down out of its triangle wedge pattern…a bearish sign. For now the trend is down, & we never argue with the trend.

In yesterday’s Musings we reiterated our long US dollar forecast & with the US dollar breakout combined with excess production by OPEC & US production declines slowing, we remain bearish for oil at this time. As noted previously, our projection is for the final leg down to see oil prices to the low $30’s, likely before year-end.

If we get a steep decline soon, we may send out some BUY alerts to subscribers, as tax-loss selling may offer some nice bargains.

In 2014, when we forecast that the US dollar would appreciate to levels that the masses could not fathom, many thought we were nuts. How could we make such a prediction when at the same time, we were highlighting the massive, unsustainable US debt situation?

And it wasn’t just that the US was in a serious debt situation, it was the how aggressively they were adding to that massive debt. It took the US almost 220 years to rack up its first $8.5 trillion in debt…then they doubled it in the last 8 years alone.

The US total Federal debt is now over $18 trillion & growing.

While the US continues to pile on more debt, the amount the government must pay to service that debt increases. According to the US Treasury Dept data, last year the US government spent $430 billion just to pay the interest to service their outstanding debt.

That is a mind numbing number…$430 billion to cover just one year’s interest on the debt. And that is when interest rates are at historic lows. What happens when the interest rates ‘normalize,’ & double from current levels? Obviously, the payments to service this debt would also double.

So we understand why people get confused when we highlight all these minefields, yet at the same time forecast that the US dollar is going to reach levels that no one else can imagine.

The ‘least ugly’

As we have noted many times in these Musings & The Trend Letter, the US dollar will collapse eventually, but not yet. One of the main messages that we keep preaching is that we are in a global economy, & while the US has built up a massive, unsustainable level of debt, an amount that can never be paid off, there are other countries & regions that are in even more dire trouble than the US. The reality right now is, the US is the ‘least ugly’ of a group of very ugly global economies.

While rising rates will hurt the US economy, it will massacre many of the Emerging Market countries & companies. Why? – because these countries & companies have accumulated huge amounts of US dollar denominated debt.

When the US Federal Reserve started dropping the interest rates in 2008, it flooded the globe with cheap money. Hedge funds & large investors jumped in on this US dollar carry trade (borrow in US Dollars & then re-invest in other assets).

It seemed like a no-brainier to them. if you can borrow in US Dollars at 0.25%, & move that money into anything yielding more… you could make a killing. Hedge funds were borrowing $10 million, paying just $25K in interest & then turning around & buying some Emerging Market bonds yielding 8%-11%. locking in massive returns.

What could go wrong?

It wasn’t just hedge funds or investors that were taking advantage of this cheap US money, governments & companies also borrowed in US Dollars to fund various projects. Everyone was scooping up this cheap money & re-investing it in other areas. The latest estimate that we can find show the total amount of money borrowed in US dollars & invested in other assets = $9 trillion.

Now the Fed is looking to ‘normalize’ rates. With rising interest rates in the US, the ensuing rise in the value of the dollar will wreak havoc among emerging markets’ governments, financial institutions, corporations, & even households. Because they have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising US rates will push emerging markets’ domestic interest rates higher, thus increasing debt-service costs further.

We keep reading & hearing various analysts warning of the demise of the US dollar.Yes, eventually, the US dollar will come under serious pressure, but that time is not now. What these mainstream analysts keep missing is that we live in a global economy & right now the US is NOT the big problem.

Look at this chart…it tells the story. The US dollar is gaining strength against ALL major currencies.

It also explains why commodities, precious metals etc are getting hit, they are priced in US dollars. When the dollar rises, the value of those assets declines.

In order to survive this coming economic tsunami, you need to stay clear of:

long-term bonds, especially Euro & Japanese bonds

the Euro & the Yen

If you are not an American, you want to convert a good portion of your local currency to US dollars on any rally in your local currency.

What we are witnessing is the US Dollar carry trade breaking apart. Before it’s over, we will see a global crash, with the strong US dollar sending the US economy into a deflationary spiral.

For those interested, we will again open our offer of a 40% discount off the regular price for The Trend Letter. Instead of paying $599.95, you can subscribe now for only $359.95.

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Q. You have been very negative on the future of the Euro, yet I keep reading where Merkel and company will never let the Euro collapse. What makes you so sure of the Euro’s demise?

A. The Euro is doomed for a number of reasons, all of which we have chronicled many times in issues of The Trend Letter & in these Market Musings.

The first problem is that they created a Monetary Union where the 19 of the 28 Eurozone countries share the same currency, but they did not create a Fiscal Union where they share the debt.

For most countries, when they run into economic trouble, they can make adjustments with their Fiscal & Monetary policies to help the economy recover. The big problem for the Euro countries is that their economies are not all the same, each country has its own issues.

Some countries are big exporters outside the Euro zone, & would therefore prefer a lower currency rate. Germany exports a lot of their goods & services within the euro-zone, so they typically like a strong Euro.

So we have all these countries with their own unique economic issues, yet there is only one Monetary policy for all. The recent Greek crisis demonstrated this perfectly. Greece needs a very cheap currency to boost its economy, but they had no control over the currency.

While the single Monetary policy is a big part of Europe’s problems, there are many others. Germany has always been the ‘engine’ that drove the European economy. But now with issues like the Volkswagen emissions crisis, that engine is sputtering.

And now we have the huge migrant & refugee crisis that is hammering the economies of these already stretched economies. We are seeing demonstrations & riots, as many nationalists see these refugees & migrants as coming to steal their jobs, threaten social cohesion, & raise welfare spending.

With millions more expected to arrive, this economic & social crisis is going to ramp up dramatically. With already high unemployment numbers, these new migrants are going to fuel more & more racial, religious, & other social unrest in these regions.

While Merkel & the other politicians may wish to save the Euro, the trend for the Euro remains down. Nothing goes straight up or straight down, but over time we expect to see the Euro below par with the US dollar.

Over the past 7 years the Euro has lost almost 35% of its value. We expect that trend to continue, likely to the point where the Euro collapses.

Q. You have emphasized a number of times in The Trend Letter how 1862 was Key Support for the S&P 500. That level was tested in August & September and held. Does that mean this current rally is the start of the next phase of the bull market?

A, We can’t give our targets in this publication, as it would not be fair to the paid subscribers. But we can tell you that along with our models, we use a number of indicators to determine what the trend is.

For the S&P 500, we were looking for a significant correction, one that would drive all the bulls out of the market. Such a move would trigger a major BUY signal for us, as we are ultimately expecting a very strong US equity market. While we do have a current long position with the S&P 500, there are some issues with this current rally that suggest we are not out of the woods yet.

One of the indicators we like to use is the 300 day Moving Average. As we can see on the following chart, over the past 15 years, the 300 day MA has been a dependable indicator of a trend change. We have highlighted with green arrows when the S&P 5000 crossed above its 300 day MA, & with a red arrow when it has crossed below that line.

We also highlighted in yellow where in late 2011 it had a very brief decline & also today’s time frame where it briefly dropped below, & is now above that line.

Right now we need to wait & give the markets a bit more time to determine if this is indeed the start of the next big run, or if it is just a brief breach of that threshold, & another leg down is imminent.

Q.You have been very bearish for gold since its high in 2011. When do you see yourselves turning bullish again?

A. Technically, gold is still in a downtrend channel, as we can see on the chart below, Other than a few rallies & steep declines, it has remained in that channel since August of 2011, when we gave our SELL signal to get out of gold.

From here gold needs to break out of this channel, meaning that it needs to break above 1200, & stay above that trend line. Given its failure recently to have a weekly close above 1180, gold is looking weak here.

In 2013 when gold was over 1500, we forecast that gold would ultimately hit the 1070-1090 level. Last year, we told The Trend Letter subscribers that our models had added a potential low of less than 1000, with a target of 875-925.

Watch 1070 closely, if it is breached then that sub 1000 target becomes valid.